Navigate the Paper Trail

You've found the franchise of your dreams. Now the real work begins. Find out what the FDD, financial statements and franchise agreement really mean.

Through your preliminary research, you've found a great franchise opportunity. But before you sign on the dotted line, you need to find out if this opportunity is as good as it sounds. Your next step is to analyze it thoroughly to determine whether it's really worth buying.

Much of the information you'll need to gather in order to analyze a franchise will be acquired through the following:

  • Interviews with the franchisor
  • Interviews with existing franchisees
  • Examination of the Franchise Disclosure Document (FDD)
  • Examination of the franchise agreement
  • Examination of the audited financial statements
  • An earnings-claim statement or sample unit income (profit-and-loss) statement
  • Trade-area surveys
  • List of current franchisees
  • Newspaper or magazine articles about the franchise
  • A list of the franchisor's current assets and liabilities

Through this research, you want to find out the following:

  • If the franchisor as well as the current franchisees are profitable
  • How well-organized the franchise is
  • If it has national adaptability
  • Whether it has good public acceptance
  • What its unique selling proposition is
  • How good the financial controls of the business are
  • If the franchise is credible
  • What kind of exposure the franchise has received and the public's reaction to it
  • If the cash requirements are reasonable
  • What the integrity and commitment of the franchisor are
  • If the franchisor has a monitoring system
  • Which goods are proprietary and must be purchased from the franchisor
  • What the success ratio is in the industry

Don't be shy about asking for the required materials from the franchisor. After all, they'll be checking you out just as completely. If they aren't, that should sound a warning bell. Another warning sign is if the franchisor asks you to sign a disclaimer stating you haven't relied on any representations not contained in the written agreement. Such a requirement could indicate that the franchisor doesn't want to be held responsible for claims made by its sales representatives.

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